IBC resolutions and haircuts

 

Dhanlaxmi Bank in the news

Dhanlaxmi Bank (dhanbank) was in the news recently on account of two exceptional events. RBI took the rarest of the rare move in advising the bank’s board to terminate the services of its CGM Shri P.Manikandan in the third week of September 2020. Before the dust settled down, the shareholders of the bank sprang a surprise, by rejecting the resolution on appointment of Shri Sunil Gurbaxani, as the bank’s MD &CEO, in their annual general meeting (AGM). 

Since this closely followed the events in the AGM of LVB (Lakshmi Vilas Bank), which also rejected the appointment of their MD& CEO, everyone was tempted to draw parallels between the two banks. However to the credit of dhanbank, its financials are on a much stronger footing than LVB, which reported negative core equity for the quarter ended 30^th June 2020.  Naturally, anyone will be interested to know the reasons for rejecting the appointment of MD & CEO, whose name was approved by the regulator. While the actual reasons might never be known, as per paper reports, one issue relates to difference of opinion in opening new branches in the northern states. In the above background, I made an attempt to understand a little more about dhanbank, from the reports available in the websites of the bank, BSE and credit rating agencies and what is the way forward to the bank according to me. (My views on LVB is available at https://viswoice.blogspot.com/2020/09/crisisin-lakshmi-vilas-bank-lakshmi.html )

Period of Crisis:

The shareholders of dhanbank, which reported healthy financials in the last two years (see table* below), cannot be faulted if the apprehension is around opening up of business in northern states. It took eight long years for the bank to come out of the financial mess it was put into, due to shift in business focus/practices in the period preceding 2011-12. The problems came out in the open, when the bank reported a net loss of Rs.116 cr. for the FY 2011-12. Only in the previous financial year (2010-11), the bank recorded its highest business levels of Rs.21965 cr. (Total Deposits Rs.12530 cr. (76% growth) and Gross Advances Rs.9065 cr. (21% growth)) and was also awarded the “Best Mid-sized Bank in Growth Category” by Business Standard - KPMG Survey. In March 2013, the bank came back to black by showing a marginal profit of Rs.2.6 cr. mainly due to reduction in operating expenses by more than 30%, (saving Rs.150 cr. in the process).  However due to continuous deterioration in the loan portfolio, impacting its interest income and increase in provisions, the bank reported its highest net loss of Rs.251 cr. in Mar 2014, followed by  net losses of Rs.241 cr. and Rs.210 cr. in Mar 2015 and  Mar 2016 respectively. Due to continuous losses and RoA being negative, the bank was placed under PCA (Prompt Corrective Action) by RBI in Nov 2015@, though triggers in respect of net NPA and CAR were not breached. Only from FY 2016-17 onwards, better results were posted and the highest net profit of Rs.66 cr. was achieved in FY 2019-20.

*Particulars	Mar 2019	Mar 2020
Core equity CET 1(%)	10.57	10.69
CAR(%)	13.75	14.41
Net Profit (Rs. in Cr.)	12	66
GNPA(%)	7.47	5.9
NNPA(%)	2.41	1.55
PCR(%)	85	90

@The Bank came out of PCA in Feb 2019.

Major Reasons for Turnaround:

Dhanlaxmi Bank adopted a twin strategy approach to maintain its CAR above trigger levels during the period 2011-20. One was through its ability to bring in core equity from its existing as well as new shareholders by way of QIP/preferential allotment basis and successful issue of Tier II bonds (Rs.768 cr. was raised through CET-1 and Tier II bonds during 2013-20). The other was by reducing the risk weighted assets through pruning its advances portfolio gradually from a peak of Rs.9065 cr. in March 2011 to Rs.6800 cr. in March 2020.

While the above steps helped the bank to fully provide for bad advances without any impact on CAR, it took the following steps to achieve operating efficiency and net profit.

1.    The advances portfolio is well diversified now with 71% of its total advances under non-corporates. Retail and Gold alone contribute 45% of gross advances

2.    High cost bulk deposits were replaced with retail term deposits and CASA.

3.    Operating expenses, which was reduced by more than 150 cr. in FY 2012-13, was maintained at the same level afterwards. (In 2012-13, the staff strength was reduced to 2600 from a level of 4552 in Dec 211, higher salaried people faced wage cuts, outsourcing activities were discontinued, high rent premises were relocated etc. In the years that followed, the bank reduced its  branch and ATM network considerably which stood at 247 and 254 respectively as on 31.03.2020)

4.    Optimising the treasury income among other income.

(As this article is based on reports available in the websites of the bank, BSE and credit agencies, I am unable to comment whether the recoveries from bad advances played a part in the turnaround)

Vulnerabilities, however, still remain:

a.    Inspite of the good results posted in the last two years, the bank remains vulnerable. It is one of the smallest banks in India with Universal Bank licence. Since its business levels are on the decline in the last 10 years, the scope for expanding total income to withstand shocks is limited. For example, while it reported a net profit of Rs.12 cr. in March 2017, it was under net loss (Rs.25 cr.) again in Mar 2018, since full provision was made in respect of a loan account of Rs.50 cr. declared as fraud.

b.    As per the notes to accounts for the quarter ended June 2020, the bank holds Rs.46 cr. as provision, equivalent to 10% of loans in respect of loans that are under moratorium in the COVID period. This means that app. Rs.460 cr. of loans and advances are in moratorium.  There is an urgent need to restructure the eligible accounts as otherwise the accounts might turn into NPAs calling for additional provision.

c.  Deposits, which is the lifeline for any bank, has to grow at least marginally every year to ensure that the existing customers are ‘in the connect’ and are not taken away by the competitors.  Though it is very much possible that the bank shed high cost deposits in the relevant period, retail deposits should have grown at least to that extent; but total deposits as on 31.03.2020 (10904 cr.) is short by Rs.1500 cr. when compared with the figures as on 31.03.2011 (12530 cr.).

d.    Interest Income constitutes the main income for any bank and the net interest income is an influential factor in the final operating profit achieved. Though the loan portfolio is well diversified and loaded in favour of retail, there is an urgent need to grow the loan portfolio also so that income is available to withstand shocks.

e.    While the infusion of fresh capital helped the bank to post impressive CET 1 and CAR ratios, the net worth is still less than Mar 2011 levels (given below) implying that the infusion was mainly utilised to wipe out the losses.                    (Rs. in cr.)

*Particulars	Mar 2011	Mar 2020
Paid up Capital	85	253
Reserves excluding revaluation reserves	759	574
Net Worth	844	827

Similarly, CASA ratio has improved by 7 per cent in the last 9 years, but in absolute terms, the growth is less than Rs.500 cr.

*Particulars	Mar 2011	Mar 2020
CASA	2869	3249
CASA(%)	23	30

Way Forward: My views:

1.    RBI has approved an interim arrangement for formation of a Committee of Directors to exercise the powers of Managing Director & CEO till such time a new MID & CEO takes charge and the committee consists of three members, all of whom are independent directors of the bank’s board. This was necessitated as the Bank had no other executive director other than the MD & CEO.  This is the second instance in quick succession that the appointment of a MD & CEO is rejected by the AGM.  RBI should seriously consider to post a director in the executive category in addition to the position of MD & CEO in all the banks to avoid stopgap arrangements.

2.    There might be issues of corporate governance/conflict of interest, when the committee comprising independent directors have to decide on operational matters (like sanction of advances, investments, compromise, purchases beyond certain limits, etc.) and subsequently put up to the board for approval/review. It will be in the interests of the bank and that of the independent directors in the committee that the process of identification and appointment of the new MD & CEO is completed as early as possible.

3.    While the shareholders apprehensions, if any, on changes in the approach of the management in doing business, is understandable, there can be no two opinion that the bank has to grow exponentially in deposits and advances, if it has to survive. With SFBs on the scene in a big way and dhanbank is the junior most among the major private banks in Kerala, business growth appears to be the only viable proposition. The bank might find it difficult to raise equity, even from the existing shareholders, if the growth story does not follow the consolidation phase of the last 9 years.

4.    The bank can leverage the reputation it enjoys in Kerala and neighbouring states to have a good growth of at least 15 per cent in a year in deposits and advances. After all, it has more than 140 branches in Kerala and nearly 210 branches in South India.

V.Viswanathan

5^th October 2020

Annex:

Changes in Shareholding Pattern: Since more than 90% of the votes polled in the AGM were for rejection of the appointment of the MD & CEO, I was curious to look at the share holding pattern. Interestingly, the Bank has no promoter shareholders and majority of the shares are held by individuals.  From 8.51 cr. shares issued as on 31^st March 2011, the number has gone up steadily and stand at 25.3 cr. as on 31^st March 2020. The shareholding pattern as shown in the BSE is as under:                                                                                                                                                                                              (%)

Shareholder category	Mar 2011	Mar 2020
Resident Individuals	35.8	65.42
NRIs	6.1	9.20
FIIs	32.7	11.45
FIs/Insurance	0.2	0.88
Corp Bodies	18.4	8.52
Others	6.8	4.53
Total	100.0	100.0

 Four individuals (27.5%) and FIIs (11.45%) account for 39% of the total shares of the bank.